Textbook Notes (369,067)
Canada (162,366)
York University (12,903)
ADMS 2500 (62)
Chapter

ADMS 2500 Module 9- Accounting for Inventories.docx

5 Pages
176 Views

Department
Administrative Studies
Course Code
ADMS 2500
Professor
Brian Gaber

This preview shows pages 1 and half of page 2. Sign up to view the full 5 pages of the document.
Description
ADMS 2500 Nov.04.2011 Module 9- Accounting for Inventories Inventory - goods held by retail or wholesale business called merchandise inventory - goods held for sale by manufacturing called finished inventory - inventories of manufacturing also include raw materials and work in progress inventory - significant asset - inventory accounting for merchandisers is the firm that buys the finished products to sell to their customers The Need for Inventories - need to decide optimal level of inventory to carry - firm can sell more goods then it purchases or produces only if it has a beginning inventory Inventory Valuation - accounting correctly for inventories is important in determining net income - changing dollar amount for ending inventories changes net income dollar for dollar - dollar amount of inventory dependent on: ~ quantity ~ price quantity x price = goods on hand at specific time - ‘taking’ inventory means: (1) counting the items involved (2) pricing each item (3) summing the amounts Effect of Inventory Errors - accounting inventories effects income measurement by assigning costs to different accounting periods as expenses - total cost of goods for sale during the period must be allocated between current period’s usage (COGS, an expense) and amounts carried forward (end of period inventory, an asset) - overstating/understating inventory overstates/understates income Complexities of Inventory Accounting - major problems in inventory accounting arise because the unit acquisition costs of inventory items fluctuate over time - variation in values of inventories result only from the changes of quantities Specific Identification and the Need for a Cost Flow Assumption - individual items sold can sometimes be matched with specific purchases - cost can be marked on the unit or on its customer, or the unit can be traced back to its purchase invoice or receipt - accounting solves issue of tracing cost flow not physical flow of goods - inventory costing problem arises because of two unknowns in the inventory equation: - question is to compute amounts for the units in ending inventory based on: most recent costs, oldest costs, average costs or some other cost Cost Flow Assumptions - accountant computes acquisition cost applicable to the units remaining in the inventory - three cost flow assumptions: (1) first-in, first-out (FIFO): oldest costs are flowed to cost of goods sold, most recent costs are used to value inventory (2) last-in, first-out (LIFO): most recent costs are flowed to cost of goods sold, oldest costs used to value inventory (3) weighted average: both units sold and units remaining in inventory are priced at the weighted average- dollar value of goods available for sale/unit available for sale First-in, First-out (FIFO) - assigns cost of earliest units acquired to the withdrawals and the cost of the most recent acquisitions to the ending inventory - the cost flow assumes that the oldest materials and goods are used first - cost flow assumption conforms to good business practice in managing physical flows, especially in the items that deteriorate and become obsolete Ex: TV set 1 is assumed to be old; whereas TV sets 2 and 3 are assumed to remain in inventory Weighted Average - average costs of all goods available for sale during the accounting period including the cost applicable to beginning inventory must be calculated - applied to units sold and those on hand at the total dollar amount at the end of the month Ex: if TV set sold on the last day of the accounting period than 280 [=t/3 x (250 + 290 + 300)] cost of goods sold is $280 and ending inventory is $560 = 2 x 280 - only works in a periodic inventory system - if perpetual system is used, must use moving average, where units are recognized as coming and going and must redo the calculations after every transaction Last-in, First-out (LIFO) - assigns cost of latest units acquired to the withdrawals and the cost of the oldest units to the ending inventory Ex: if TV set sold on last accounting period when all three sets
More Less
Unlock Document

Only pages 1 and half of page 2 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit